The markets appear to be in a bubble. What do investors do now?

For many, valuations seem stretched as they fluctuate at levels similar to those in the peak days of 2000. That said, high valuations alone do not mean that the high is nearing an end, investors say. History shows that markets have often been able to rise much longer than previously thought possible, either with the dot-com boom in the late 1990s or the dizzying increase in Japanese stocks in the 1980s.

And recently, the broader stock market is in decline. The S&P 500 fell 3.3% last week, although it remains up 66% from the March low. The bubble-like behavior was mainly contained by a handful of individual stocks, not by higher indices.

An even bigger problem against a bubble across the market is simple math. With interest rates rocketing and more stimulus on the table, many investors are being generously rewarded for putting their money into riskier, higher-yielding assets. Furthermore, in many cases the gains were sustained or were robust, despite a global pandemic.

This combination of factors helped to boost investor optimism. Optimism in stocks among money managers is up in three years, according to a recent Bank of America survey of 194 money managers who oversee $ 561 billion in assets. Meanwhile, the average share of money in portfolios – usually a hedge against market turmoil – is at its lowest level since May 2013.

However, investors are trying to identify what could cause bubbles to burst between individual stocks and whether any of the explosions will spread to the broader market. Next week, investors will see new data on the manufacturing sector, profits from Amazon.com.

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and Alphabet Inc, father of Google.

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and the January employment report.

“You know, this ticked all the boxes in a history book,” said Jeremy Grantham, co-founder of Boston Grantham financial manager, Mayo, Van Otterloo & Co., who predicted the 2000 and 2008 market declines. Mr. Grantham has called the current market overheated since last year.

But even he admits that the moment at the top of the market is difficult.

“We know that each bubble is a little different and, with the help of new trading platforms and the internet, it can break more records,” he said.

Mr. Grantham is not alone in his concerns. Almost 90% of about 627 market professionals think that some financial markets are in a bubble, according to a recent survey by Deutsche Bank. Meanwhile, Google searches for the term “stock market bubble” reached a historic record in January.

Jerry Braakman, chief investment officer at First American Trust, says that his company, concerned about the tightened valuations in the U.S., has gradually been transferring more money to stocks elsewhere.

Lately, “the market has not been correlated to the macro picture,” he said.

Although the movements in some stocks and assets have been shocking, analysts and investors say they are not surprised by speculative and rampant activity in the financial markets.

A super comfortable Federal Reserve, low interest rates and, more recently, optimism about the coronavirus vaccine and the economy have sustained much of the buying by investors in the past 11 months. Many Americans have increased their savings during the pandemic – and they stand to gain even more if Congress continues with another stimulus package. And the prospect of low returns on most other assets has led investors to buy stocks more aggressively.

In addition, more individual investors are trading than ever before. These investors threw their weight last year by shocking Wall Street veterans with a series of irrational stock choices, including Hertz Global Holdings Inc.,

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which skyrocketed nearly 900% from its low to its high after filing for bankruptcy protection.

This year’s encores were even more impressive. On Wednesday alone, 24.5 billion shares and 57.1 million option contracts changed hands, a record driven by individual investors, according to Rich Repetto, managing director of video game retailer Piper Sandler & Co. a gain of more than 1,700% since the beginning of the year.

“This is just one example of what is becoming tens of tens,” said Grantham. Other retail darlings include AMC, which jumped more than 300% on Wednesday, and BlackBerry Ltd.

, whose shares on the same day registered their biggest gain in more than 17 years.

Companies are rushing to take action.

The companies have raised $ 13.4 billion through 24 IPOs so far this year, a 300% jump in listings over the same period last year, according to data from Renaissance Capital. Blank check companies continued to flood the market, with 91 raising about $ 25 billion, almost a third of the amount raised over the past year, according to SPACinsider.com. And there were 111 additional stock offers by companies listed in the United States, doubling the number from the same period last year, show the data from Dealogic.

Typically, this frantic activity would lead large money managers to abandon stocks. But many argue that the shares of GameStop, AMC and other bullish stocks represent their own bubbles – and do not pose a threat to the entire financial ecosystem. Goldman Sachs Group Inc Analysts.

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they say that the increase in unprofitable stocks, which they say represent about 5% of the general market, presents little risk of contagion.

“These shares do not make up the majority of the stock market,” said Samantha McLemore, portfolio manager at Miller Value Partners, a $ 3.5 billion asset manager. “There are so many areas of the market that we find that they are attractively valued.”

At first glance, investors’ preference for measuring valuations and price / earnings ratios suggests that the market looks expensive.

The S&P 500 is currently trading at 22 times the projected earnings over the next 12 months, not far from the 25 times the index traded in 2000, just before the dot-com crash, according to FactSet.

But that is only part of the picture. This level seems less worrying since low interest rates and earnings, which are expected to rise, are considered, said several investors and analysts.

A simple explanation of why investors did not back down any more?

“We’ve seen this in the past – if you think you have a bubble and sell very early, it can be a very expensive operation,” said Braakman, of the First American Trust.

Write to Michael Wursthorn at [email protected] and Akane Otani at [email protected]